Pakistan all set to generate $3b through euro, sukuk bonds

Pakistan all set to generate $3b through euro, sukuk bonds

ISLAMABAD/lahore -  Pakistan is all set to generate up to $3 billion by issuing euro and sukuk Bonds in international debt market, as road shows for introducing bonds will start in United Arab of Emirates (UAE), Europe and United States from today (Wednesday).

The federal cabinet in early November had given approval to borrow up to $3 billion from international debt markets by floating three sovereign bonds to sustain depleting foreign exchange reserves. The government’s plans to raise loans from the international market by issuing bonds would support the foreign exchange reserves, which are under pressure due to widening trade deficit.

Pakistan’s external sector is under pressure due to widening of current account deficit (CAD), which is eroding the foreign exchange reserves of the country. The reserves are sharply tumbled by over $4 billion in one year to $19.8 billion. The reserves are pressure due to widening of current account deficit, which surged by 100 percent to $5.013 billion in the first four months (July-October) of the current fiscal year as compared to $2.259 billion of a year ago. The CAD is widening as higher imports growth offset the improvement in exports.

Feeling the heat of situation, the government has taken measures to increase foreign financial inflows, especially timely launch of sovereign bonds at internal capital markets. “We are expecting to generate up to $3 billion. However, exact amount will be decided after a response from the international market subsequent to road shows,” said an official of the Ministry of Finance. He further said that an economic team including the State Bank of Pakistan (SBP) governor and Ministry of Finance secretary have left to spearhead the road shows.

Giving details, the official said that first road show will be held today (Wednesday) in Dubai. The Dubai show is followed by one in London scheduled to be held on November 23 and November 24. After holding shows in Europe and UAE, a Road Show in Boston is scheduled to be held on November 27 and in New York on November 28.

It is worth mentioning here that Pakistan had successfully tapped international capital market four times since 2014. The government borrowed $2 billion in 2014 through capital market transactions. Pakistan floated Sukuk in September 2016 at the lowest interest rate of 5.5 percent but in September 2015 five-year Eurobond at 8.25 percent was the most expensive deal.

The incumbent government had taken around $35 billion foreign loans during last four years in order to maintain its reserves and repay previous loans. About $17 billion of the total loans taken were utilised to repay the previous debt during last more than four years.

Both Sukuk and Eurobond are expected to be offered with tenures ranging from 5 to 30 years. The S&P earlier has assigned preliminary B rating to Pakistan’s proposed dollar bond issue. Comparable bonds of other countries have been recently floated as follows: Iraq (S&P: B-) raised 6-year bond of $1 billion at 6.75 percent; Ukraine (S&P: B-) issued 15-year bond of $3 billion at 7.375 percent; Ghana (S&P: B-) raised 15-year bond of $750 million at 9.25 percent and Turkey (S&P: BB) raised 10-year bond of $2 billion bond at 6.15 percent.

Given the recent Eurobond issues of different countries and S&P’s assessment that Pakistan economic prospects remain favorable, experts are of the view that the government will likely be able to raise $2-3 billion with pricing in the range of 5.5 percent-7.0 percent for 5 to 10 years. This will provide the much-needed support to Pakistan’s foreign exchange reserves.

Current yields of Pak Eurobonds range from 4.5 percent to 7.5 percent for maturities from 2019 to 2036. Average calendar year to date average yield for 2019 bond is 4.3 percent while that of 2036 bond is 7.6 percent. The government last had raised $1 billion through issuance of 5-year Sukuk in October 2016 at historic low rate of 5.5 percent, besides floating a 10-year Eurobond of size $500 million at 8.25 percent in 2015.

Financial experts said that the new issue comes at a time when Pakistan’s external account has deteriorated as of late. During FY17, Pakistan posted current account deficit (CAD) of $12.2 billion (4 percent of GDP) as compared to $2.6 billion (0.9 percent of GDP) in FY16. For the period July-October 2017, CAD increased to $5 billion (1.6 percent of GDP) compared to $2.2 billion (0.7 percent of GDP) last year. Resultantly, foreign exchange reserves with State Bank of Pakistan declined by $2 billion in FY17 and $2.5 billion during FY18 to date to $13.7 billion, 3.1 times import cover versus average of 4.0 times import cover during previous three years.

Topline securities analyst Fahad Qasim observed in a report that other than economic concerns, the country remains embroiled with political uncertainty given recent ouster of prime minister Nawaz Sharif and continued politicking by local political parties given that general elections are expected to be held in less than a year in August 2018.

He noted that Pakistan’s credit rating has remained stable or improved during the last few years. International credit rating agencies, Moody, Fitch and Standard & Poor (S&P) rate Pakistan as B3 (stable), B (stable) and B (stable), respectively. The recent most update from S&P dated October 30, 2017 stated that S&P does not expect Pakistan’s external and fiscal situation to deteriorate materially from current levels and that Pakistan’s economic prospects remain favorable.


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